In today’s session, USD/JPY trades 0.03% higher, having fallen below the key level of 144.000 courtesy of a weaker dollar, increased safe-haven demand, and a narrowing interest rate differential.
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USD/JPY Key Takeaways
- Primarily due to a fall in dollar value, USD/JPY currently trades at around ~144.058, representing two-week lows for the currency pair
- Renewed tariff fears, geopolitical tensions, and general uncertainty on the US economy are allowing the Japanese yen to strengthen against the U.S. dollar
USD/JPY: Yen benefits from renewed safe-haven flows
With global equities somewhat wobbly this week, markets have made a notable shift towards yen strength, renewing demand for typical safe-haven assets.
Compounded by a credit rating downgrade on U.S. sovereign debt last week, nervousness surrounding US trade policy and the latest developments on Trump’s ‘big, beautiful’ tax bill have done little to calm market nerves, with questions rising on how the current administration will address a ballooning US deficit and rising interest costs.
At least in part, the outcome has been a weaker dollar, with USD/JPY trading around ~1.09% lower in this week’s trading.
USD/JPY: Tide turning on Japanese bond yields
Snoynmous with ultra-low interest rates for the best part of 20 years, the Bank of Japan’s change in monetary policy, bookmarked by the appointment of Kazuo Ueda, represents a profound shift in perception for the Japanese economy, and by extension, the yen.
At least one outcome has been rising Japanese bond yields, with longer-dated treasuries gaining value massively under the new monetary policy outlook. Recently, the 30-year yield hit a 25-year high of ~3.2%, while the 40-year yield reached over ~3.5%, its highest point since inception in 2007.
With the differential between US and Japanese treasuries becoming increasingly narrow, the dollar is becoming less attractive to hold, especially when considering the stark difference in current predictions on future monetary policy of the Fed and the Bank of Japan, respectively.
Worsened by a continuing unwinding of the infamous yen carry trade, any further reduction in the yield differential between US and Japanese treasuries will likely encourage further USD/JPY downside.
USD/JPY: Increased US rate cut bets weaken dollar-yen exchange rate
With markets currently pricing in two Fed rate cuts and one Bank of Japan rate hike before year-end, the attractiveness of holding the dollar over the yen, at least by some metrics, is set to be reduced.
While the latest US data shows inflation cooling faster than first predicted, Japanese inflation remains stubborn, further cementing current monetary policy predictions.
Further commitment to this narrowing interest rate differential trajectory, whether in policy decisions or general commentary, will likely lead to further USD/JPY downside.
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A chart showing the recent price action of USD/JPY. OANDA,TradingView, 22/05/2024
USD/JPY technical analysis
- Breaking a 6-day losing streak in today’s session, USD/JPY remains bearish at a technical level. Decisively breaking the key level of 145.000 earlier this week, bears will likely target previous lows at ~142.384 in price breaks down further
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